ALEX BRUMMER: Curbing Bank of England's divine right

Food for thought: The Bank and Sir Mervyn King have been given new powers designed
to improve stability

If there were any doubt about the power and importance of central banks it has been proven since the financial crisis first erupted in the summer of 2007.

At every stage the Bank of England, the Federal Reserve and the European Central Bank have played critical roles in keeping banks afloat and preventing the world economy from slumping into a 1930s-style recession.

Many of the steps taken have stretched central bank mandates. The ECB’s decision to flood the markets with cash in the summer of 2007 was the first of its kind and moved its role beyond setting interest rates to supporting the banking system.

The Fed’s decision to bail out industrial groups with financial arms, notably General Electric, in the wake of the Lehman collapse a year later was unprecedented.

And the Bank of England’s secret support operation for Royal Bank of Scotland and HBOS in September 2008 – as the cash machines were about to freeze up – expanded its powers.

As part of the post-crisis reforms, the Bank and its governor, Sir Mervyn King, have been given new powers designed to improve stability and prudential supervision. If the Bank was regarded as too powerful before and during the crisis it certainly is now.

Moreover, there is little democratic tradition within the Bank. At the time of the financial crisis the Court, essentially the non-executives who are there to protect the public interest, largely was kept out of the loop on stability.

It didn’t learn about Northern Rock until the BBC was broadcasting its rescue to the world. Inside the Bank King, for all his intellectual qualities, is not known for a collegiate style.

So it is fitting that an institution which rightly has such freedom of action should also be more accountable. The Treasury Select Committee’s suggestions of an empowered and renamed Court, removed from the Bank’s day-to-day activities, seem eminently sensible. The quid pro quo was the governor’s job would be safe for a single term of eight years.

King now suggests that instead of a more powerful Court, the Bank erects yet another layer of bureaucracy, an ‘Oversight Committee,’ to watch over its work on stability and prudential supervision. At the same time the eight-year term of office will remain in place.

The TSC should not be shifted from its original idea of a restructured and stronger Court.

As for an eight-year single term for the next governor, that feels too long.

There can be no justification for a governor to serve a longer term in office than MPs and governments, which must go through an election every five years.

There must also be a mechanism which allows the recall of a renegade or useless governor. In August 1979 President Jimmy Carter lost no time in replacing G William Miller at the Federal Reserve and replacing him with Paul Volcker when the former failed to deal with surging inflation and a dollar crisis.

Even central bankers should not be considered inviolable.

Paper tiger

DS Smith and its advisers have done all in their power to make sure that an audacious £1.3bn offer for the recycled packaging operations of Sweden’s SCA wins approval.

Chief executive Miles Roberts is clearly anxious that this deal is not measured against G4S’s aborted Danish venture.

But without engaging in reverse xenophobia there are questions to be asked as to whether this is really the best moment to engage in a large fundraising, which doubles the size of the company, so as to become more deeply involved in Europe’s fast-moving consumer goods market.

Indications are that the euro crisis is getting worse and ever more countries are likely to be drawn into the cauldron. With growth expected to stutter and no signs of recovery on the horizon, it seems a very odd time to be scaling up in Europe.

Far better if DS Smith followed the current advice of George Osborne and looked to the fast growing economies of Asia and Latin America for expansion rather than being sucked deeper into Europe.

Much is being made of the fact Standard Life Investment is casting its 15 per cent vote in favour of the deal and will support the rights issue. But as we know from the Scottish banks, even Edinburgh-based institutions are not immune from error.

Burberry's Asia checkmate

Just why Asia is a much better bet than Europe has again been demonstrated by Burberry where sales in the region soared 36 per cent in the three months to December.

Even better, Burberry believes passionately in making the best use of young British designers and in manufacturing in Castleford, far from the haunts of fashionistas, where it is doubling production capacity. Can’t be bad.